In the previous article, What is the average cost of solar roof in India ?, we learned that the average cost of the solar roof in India is Rs. 83 /watt to Rs. 91 / watt (without battery back up).Now let us determine the Payback period and the financial feasibility of the project.

The Payback period is the time required to cover your initial investment made in purchasing and installing the solar roof at your residence. We will determine the financial feasibility of the project through Net Present Value method, which is done by summing all the future savings after discounting them to the present value and subtracting the initial investment.

The following is the step-by-step procedure, which tells on how to determine the payback period and the feasibility of the solar roof:

(1) Determine the average cost of your solar roof

Here we are assuming that you have installed 1 KW system at your roof top which costs you in between Rs. 83,000 to Rs. 91,000. You can get the cost for the higher wattage like 2 KW or 3 KW by simply multiplying it by average cost per watt, which is Rs. 83/watt â€“ Rs. 91/watt

(2) Determine the daily average number of sun hours

You can find this data from the official website of renewable energy of your state. The average number of daily sun hours in Delhi/NCR is 5.5, therefore I am taking this value in the calculation.

(3) Calculate the units generated by your solar roof

Your 1 KW system will generate 1 KW x 5.5 hours = 5.5 KW-Hr or 5.5 units in a day under ideal conditions, that is when we assume that there will be no energy conversion losses and heating losses. But in actual conditions, there are certain losses which reduce your output power. Here we assume that our system is 85% efficient, which means that it will generate 5.5 units x 0.85 = 4.675 units in a day. The 15% of the energy will be lost as:

The conversion from solar energy to DC electrical energy

DC energy to AC energy

Dissipation of energy as heat when it passes through wires

Understanding the performance of your solar panel

When you purchase the good quality solar panel, the manufacturer provides you the performance warranty on it. It states that the solar panel will perform at 90% in first 10 years and then 80% from 11th to 25th year.

From 1 to 10 years of operation, your system will generate 90 % of 4.675 units = 4.21 units

The efficiency of the system will further reduce by another 10% in 11th till 25th years of operation, then the system will generate 80% of 4.675 units = 3.74 units. Please look at the table below:

Period

Panel Efficiency

Units generated

1 - 10 years

90%

90 % of 4.675 units = 4.21 units

11 - 25 years

80%

80 % of 4.675 units = 3.74 units

Find the average rate of electricity per unit in your area

The electricity that you receive from the grid comes at a cost, which is generally expressed as the rate per unit consumed. The rate of the unitsâ€™ consumption is divided into slabs, for first 200 units consumed, the rate of units consumed is less and for higher consumption, the slab rate increases accordingly. You can find this by simply dividing your monthly bill by the number of units consumed in a particular month. You will get the more accurate average value if you divide the total bill of a year by the number of units consumed in that particular year. Anyhow, I am taking the average rate of Rs. 4.5 / unit.

Include the maintenance cost of the system

Your system will need maintenance, after installation, on regular basis. The maintenance process will involve the following activities:

Regular cleaning of the solar panels

Checking and tightening of the loose connections, fuses and switches in the system

Checking and service, if required, the inverter section of the system

Regularly monitoring the output of the system

(Please read "Factors to consider before implementing solar PV system at your home")During initial years of operation, the cost of maintenance will be less and afterwards it will start increasing with the age of the system. We assume that it will cost us around 2% per annum of the cost of the system or you can take 10 % per annum of your yearly savings as your maintenance cost. I am taking the latter assumption in this example.

The electricity from grid will not remain at Rs. 4.5 / unit forever

By looking at the past trend, the rate of the electricity is growing at an average rate of 8% per annum. In order to get the realistic picture, we need to consider this in our accounting to evaluate the payback period. Here, we assume that the rate of electricity will grow at the rate of 8% per annum till the life of the system which is 25 years.

Summarizing all the details in the form of the table to get the Payback period

The payback period

Now to get the Payback period, you can see in the table in between 10th and the 11th year, the cumulative cost exceeds the total cost of the system, which is Rs. 91,000. Therefore, the Payback period of the system is in between 10 and 11 years, that is your solar roof will recover your initial investment in approximately 11 years. Your solar roof will give Rs. 3, 62,564.20 in 25 years. Your net savings will be Rs. 3, 62,564.20 minus your initial investment (Rs. 91,000) = Rs. 2, 71,564 in 25 years.The main disadvantage of the Payback period method is that it does not take in to consideration the time value of money. The yearly savings or income that your solar roof will generate in future, when discounted, say by the rate of inflation, will have less purchase value in present.Therefore, to get the more realistic value of your solar roof, we need to calculate the Net Present Value of the future savings or income generated by the solar roof.

The Net Present value

Net Present Value = Sum of present value of all the future savings by the solar roof â€“ The initial investment

If,

NPV < 0, then solar roof is not a feasible option and it is rejected

NPV > 0, then the project is feasible and it is accepted

I am taking the discount rate as the rate of Inflation, which is 7%. Now, discounting all the future net saving by this rate we get:

Future net savings (Rs.)

Discount rate @ 7%

Discounted savings or the present value of the savings (Rs.)

6,223.41

1.07

5816

6,776.64

1.16

5842

7,191.54

1.25

5753

7,744.68

1.35

5737

8,297.91

1.46

5684

8,851.14

1.58

5602

9,404.28

1.71

5500

10,095.75

1.85

5457

10,787.31

2

5394

11,478.78

2.16

5314

10,934.46

2.33

4693

11,671.65

2.52

4632

12,531.60

2.72

4607

13,391.64

2.94

4555

14,374.53

3.18

4520

15,357.42

3.43

4477

16,463.07

3.7

4449

17,568.81

4

4392

18,797.40

4.32

4351

20,148.84

4.67

4315

21,500.37

5.04

4266

22,974.66

5.44

4223

24,571.80

5.88

4179

26,291.79

6.35

4140

28,134.72

6.86

4101

Total

121999

NPV = Rs. 1, 21,999 â€“ Rs. 91,000 (Initial Investment)

NPV = Rs. 30, 999, which is > zero

Hence, the project is feasible and acceptable.

Conclusion

The Indian residential solar roof of 1 KW has a payback period of 10 â€“ 11 years and it is a financially feasible project.As you increase the wattage of the solar roof:

The overall cost of the system will decrease due to economies of scale

The Payback period of the project will reduce because of reduction in the Initial investment

The Net Present value of the project will increase.

*(I have tried my level best to make practical and relevant assumptions, so as to get the most realistic view of the project's feasibility)